In many ways, 1995 was a major disappointment for the automobile industry. The Chrysler Corp. predicted that sales in the U.S. market would top 16 million units, while Ford Motor Co. projected sales of 15.9 million and General Motors (GM) Corp. 15.6 million. In the event, the industry’s high expectations were not met, and sales for the year fell 1.7% behind 1994. The so-called Big Three were not alone in their disappointment. In Mexico the collapse of the peso crippled the market. In South America, especially in Brazil and Argentina, the "tequila effect" of Mexico’s crisis stalled the economy. Europe also showed surprising weakness, despite what looked like a good start to the year. Only in Japan, where sales increased about 5% from their weak levels of the year before--thanks largely to sales of multipurpose vehicles--did the industry show any sign of strength. Even so, Japanese automakers continued to run with at least 3.5 million units of overcapacity, which caused most of them to post losses.

This poor performance forced the industry to focus on expansion in less developed countries. Ford and Chrysler announced plans to begin building cars in Vietnam. Chrysler announced that it was developing a $3,600-$6,000 minicar for developing markets. Toyota began building an assembly plant to make 20,000 Hilux trucks per year in Argentina. GM began assembling Blazers from kits in Indonesia, with plans to increase production gradually to 16,000 units annually. Ford announced plans to build small cars (the Fiesta and Escort) in conjunction with Mahindra & Mahindra Ltd. in India, and Volkswagen (VW) AG, Honda, and Hyundai announced their intentions to enter the Indian market.

Virtually all automakers fought to get into or expand their presence in the Chinese market. For every winner, however, there was a loser. In 1994 China had announced its plans to permit three or four automakers to build large assembly operations and three or four to establish small ones. In the melee that followed, Chinese authorities proved adept at pitting one automaker against another. Mercedes-Benz landed a major contract to build minivans (the Viano), beating out Chrysler. General Motors beat out Ford to build an executive-class passenger car (the Buick Regal). Ford was not left out of the market, however, as it landed a contract to build a truck version of its Transit van in China in 1997, and Chrysler maintained a toehold with its joint-venture Beijing Jeep. In a move that could provide a backdoor entry to China, Toyota doubled its equity holding in Daihatsu to 33.4%. Daihatsu made 50,000 small cars annually in China, while Toyota had no presence there. Analysts speculated that Toyota would begin building its own car in China, using Daihatsu’s operations there to gain entry to the market.

Chinese authorities were specifically interested in selecting automakers that promised to produce large numbers of components in China and not just assemble vehicles from imported parts. They also prodded automakers to transfer their latest technology and commit to exporting their Chinese-made vehicles to other markets. Some industry observers warned that Chinese exports could undermine a world market already saddled with overcapacity.

Automakers also learned that developing markets operated in a state of flux. The collapse of the Mexican peso, for example, caught the industry completely by surprise. Car and truck prices skyrocketed as credit dried up, and sales fell more than 75%. In Brazil import taxes doubled to 70%, which reduced the country’s trade deficit but also caused Toyota to cancel plans to build a major assembly plant there. Ford and VW terminated their joint venture, called Autolatina, in Brazil and Argentina. In the late 1980s, when the two markets were closed and sales were stagnant, it made sense for both companies to pool their resources and split costs. When Brazil and Argentina opened their markets to more competition, however, the joint venture proved slow in introducing new products, which allowed GM and Fiat SpA to gain market share. It was not clear if Ford and VW would maintain AutoEuropa, their joint venture in Portugal.

For all the clamour to get into developing markets, the U.S. proved to be an attractive place to build cars. Toyota announced that it would build a new assembly plant in Indiana to make pickup trucks, and it increased engine production in Kentucky. Peugeot SA continued to make rumblings that it would build a plant in the U.S. capable of making 200,000 vehicles annually. Adding fuel to the rumours were reports that Peugeot had begun testing its sedans, minivans, and convertibles in Chicago, California, and Texas.

Mercedes-Benz announced studies on building a passenger car in its plant in Alabama, which would build its All Activity Vehicle. The company cited the strong value of the Deutsche Mark and rising labour costs in Germany as reasons for moving more production to the U.S. beginning in 1998. The E-class and C-class, which sold about 25,000 units annually in the U.S., were considered prime candidates.

When Japan’s currency hit 90 yen to the U.S. dollar early in the year, Japanese automakers took drastic measures to reduce their production at home and build more vehicles overseas. Toyota, Nissan, and Honda all announced plans to increase production in Europe. Toyota said that it would double its capacity in Britain, and Honda and Nissan said that they would increase production there by 50%. Meanwhile, Ford announced that it would build cars for Mazda in Europe (a Mazda version of the Fiesta) to help the Japanese company offset the strong yen without having to invest in its own manufacturing facility.

The increasing Japanese presence in Europe was not always welcome, however. European suppliers formulated plans to force Japanese automakers to buy more parts from them. The Paris-based supplier organization known as CLEPA (Liaison Committee of the European Automotive Components and Equipment Industry) specifically issued demands for Japan to import more parts from Europe and for Japanese transplants in Europe to buy more parts from its members. In a show of solidarity, the British SMMT Components Group and Swedish Automotive Suppliers organization voiced their support for CLEPA’s efforts.

The U.S. and Japan collided once again on trade talks, with automobiles playing a major role in the negotiations. The administration of Pres. Bill Clinton threatened to impose 100% tariffs on 13 Japanese luxury cars--a move that would almost certainly have driven Lexus, Acura, and Infiniti dealers out of business. The administration demanded that Japan open its markets to more U.S. cars and parts, while the Big Three demanded more dealerships. For their part, Japanese negotiators countered that their market was already open, and they refused to accept U.S. demands to set quotas as a yardstick for measuring trade progress. A new agreement was reached, at the eleventh hour, with both sides declaring victory. Japanese negotiators trumpeted the fact that the accord did not include numerical targets, while U.S. negotiators hailed the accord as a breakthrough for their "get-tough" policies. Meanwhile, the Big Three began to take advantage of the weakening dollar by cutting the prices of the vehicles they sold in Japan. Chrysler, for example, cut the price of a Cherokee in Japan by 10% and service parts by 30%.

At the 1995 Tokyo Motor Show, Toyota unveiled the Cavalier--a car made by GM in the U.S. to be sold by Toyota dealers in Japan. Toyota’s desire to sell the car was widely regarded as an effort to reduce trade tensions. Toyota, however, said that it planned to use the Cavalier to attract Japanese buyers who preferred imported cars with bigger engines and more flamboyant styling. The move could be an important strategy. Toyota’s market share in Japan had sagged to historically low levels (38%), and sales of imported cars represented the greatest growth segment in Japan.

U.S. automakers, showing increasing willingness to use their political muscle in trade disputes, also got the Clinton administration to pry open the South Korean market, which was more closed than Japan’s. South Korea shipped more than 200,000 vehicles to the U.S. during the year, while U.S. exports to Korea numbered fewer than 2,000. Meanwhile, South Korea demonstrated that its aggressive investments in new capacity were beginning to pay off. Production increased to about 2.6 million units, and South Korea surpassed Canada as the fifth largest automotive producer in the world.

As the average price of a new vehicle in the U.S. rose to more than $20,000, the issue of affordability emerged as a major issue. The 1995 Harbour Report, an annual study that compared the manufacturing efficiency of each automaker in North America, showed that the Big Three still had ample opportunity to cut costs. If Chrysler ran at Toyota’s level of manufacturing efficiency, for example, it would cut costs by $1.4 billion. Ford would save $1.7, billion and GM would save $4.1 billion. Even so, when all costs were taken into account, the Big Three had lower costs than Toyota or the other Japanese automakers.

Ford launched its global reorganization, known as Ford 2000, with a goal of cutting costs by at least $3 billion a year. The Big Three also jointly announced a program to use common design standards for simple parts such as light bulbs, jacks, and radiator caps. By eliminating duplicate engineering and development on parts on which they did not compete, GM, Ford, and Chrysler hoped to reduce investment and achieve greater economies of scale.

The need to cut costs even led Toyota to modify its famous lean production system. The new process chopped the traditional long assembly line into 11 smaller production lines, with only 15 to 20 workers on each subline. Similar or related tasks, such as installing all electrical wiring, were performed in each line. To compensate for the speed it took to complete the tasks in the different lines, a slight amount of inventory was allowed to accumulate between them. Though the system might not be as "lean," the buffers allowed the line to move faster.

In Brazil, VW executive Inaki López introduced a radical new assembly process at a bus plant near Rio de Janeiro. The bus was assembled from modules that suppliers built inside the VW plant. Each module was put together in a manufacturing cell that was totally managed by the supplier. As the bus moved down the assembly line, the supplier bolted its module onto the vehicle. While a typical assembly plant employed 2,000 to 3,000 people, López said that his new system would need only 200 to 300. While this clearly would reduce costs, it was not expected to spread quickly through the industry because of resistance from labour unions.

The growth in the used car market in the U.S. persuaded one large retailer to open franchised outlets. The retailer, called CarMax, began building outlets that offered hundreds of used cars of many brands. Each vehicle came with a 30-day warranty and a nonnegotiable price that eliminated the haggling many buyers found distasteful. Owners were also allowed to return their cars for a full refund within five days if they had not driven them more than 400 km (250 mi). CarMax caused considerable concern among new car dealers, who thought that it could steal their used car business. Automakers were also concerned that CarMax could become an outlet for new automakers trying to break into the U.S.

Brand management became the industry’s hottest buzzword in 1995. While brand management was a marketing technique that had been around for decades and had been honed to perfection by companies such as Procter & Gamble, it had not been used by mass-market automakers. When using the technique, automakers planned to emphasize each nameplate in their marketing, such as Mustang or Camaro, rather than the name of the company or division that sold the vehicle. To launch its brand management program, GM reorganized its North American operations to establish more than 30 brand managers. Not to be outdone, Ford established brand managers for every model in each country where it was sold. Ford had to face a disappointing consumer response to the redesign of its Taurus, which had been the best-selling car in the U.S.

Chrysler faced a major issue when billionaire Kirk Kerkorian, chairman of Tracinda Corp., made a bid to buy the company. At first, because he had no line of credit and no financial backers, few people treated his effort seriously. That later changed, however, when Kerkorian hired Chrysler’s former chief financial officer, Jerry York, to lead his takeover attempt. Kerkorian also enlisted former Chrysler chairman Lee Iacocca.

Kerkorian claimed that he was out to protect stockholder interests and accused Chrysler’s management of hoarding too much money for a future recession ($7.5 billion). He also berated the company’s quality as below average. (Almost as if to underscore his point, Chrysler was forced into a safety recall to fix faulty rear latches on the liftgates of about 4.5 million minivans.) After conducting a detailed financial analysis of the automaker, York announced that Chrysler was hoarding at least $2.5 billion too much, a fact that caused institutional investors on Wall Street to sit up and take notice. As the year drew to a close, Kerkorian was demanding that York be given a seat on the Chrysler board.

Kerkorian and York were not the only ones eyeing Chrysler’s cash hoard. Steve Yokich, who replaced Owen Bieber as president of the United Automobile Workers, promised that the union would make sure a portion of the cash ended up in the pockets of its members when negotiations began on the 1996 contract.

An announcement by Englehard Corp. about a system that would reduce air pollution from automobiles attracted considerable attention. Called PremAir, it consisted of a specially coated radiator that converted ozone and carbon monoxide into oxygen and carbon dioxide. The coating was made from materials similar to those used in catalytic converters and was sprayed onto the radiator. As a vehicle traveled along, it cleaned the air passing through the radiator, more than offsetting the emissions discharged through the tailpipe. Ford entered into a long-term evaluation test with Englehard to verify the system’s capabilities. John McElroy

BEVERAGES

Beer

With the ongoing success of craft brewing in 1995, Anheuser-Busch, Miller, and Coors continued their efforts to convince consumers that their products were just as good as those of their tiny competitors. For Anheuser-Busch, the world’s largest beer purveyor, the effort manifested itself in American Originals, a trio of beers said to hark back to recipes from the turn of the century. Miller Brewing took on partners with pedigrees in microbrewing, inking strategic alliances with Celis Brewing of Texas and Shipyard Brewery of Maine. Miller spent much of the year, however, trying to revive the fortunes of Miller Lite, which had lost its number one ranking in light beers to Bud Light in late 1994. Coors Brewing, whose Coors Light also was a competitor, tried to carve its niche among little beers with a product dubbed Blue Moon, which was distributed by Coors but made by the much smaller F.X. Matt.

Microbrewers themselves capitalized on the 50% rise in business of 1994. There were some 600 craft breweries operating in North America by the end of 1995, about 20 times more than a decade earlier. The most successful among them--Boston Beer, Redhook Ale Brewery, Pete’s Brewing Co.--found themselves the darlings not only of drinkers but also of investors when each made public stock offerings. The fever even spread as far as the Pacific Rim, where Asia’s first independent craft brewer, South China Brewing, opened in Hong Kong.

The most significant global transaction in 1995 involved Belgium’s Interbrew, which purchased Canada’s John Labatt Ltd. Heineken continued to reach beyond Dutch borders, buying Interbrew Italia from Labatt’s new owner and a majority stake in Zlaty Bazant of Slovakia. From the U.K. came word that Guinness would make its world-famous stout in China after having exported it there for 15 years. Leaving England was Australia’s Foster’s, which sold its Courage brewing unit to Scottish & Newcastle. The profits of China’s Tsingtao beer unexpectedly fell 49% in the first half of 1995.

The U.S. beer industry struggled toward year’s end to mount a 1% increase over 1994 sales and volume totals. Europe, on the other hand, saw volume decreasing from that of the previous year at about a 1% rate. Greg L. Prince

Spirits

The demographics of the 20-something generation that so fascinated marketers of products during the 1990s got the attention of the distilled spirits industry as well. Conventional wisdom had it that this attractive age group might be beyond the reach of a business whose reputation was rather stodgy, but companies in the spirits industry were intent on turning that thinking around in 1995.

Tradition got shaken up in several ways. The leading distiller Bacardi had not disturbed its basic rum recipe since its creation in 1862. In 1995, however, the company introduced Bacardi Limón, a 70-proof citrus spirit, whose flavour came from a blend of lemon, lime, and grapefruit. Bacardi called its release a matter of "being in touch with the marketplace of today’s consumers." Likewise, another grand old spirit marketer, Brown-Forman, gave its product line a new treatment with the introduction of low-alcohol Tropical Freezes, the first blended freezer cocktails designed to give drinkers "an easy, convenient way to enjoy great-tasting slushy bar drinks" at home.

Jim Beam, a proud name in the pantheon of spirits, celebrated its 200th anniversary in 1995. Eager to prove that it had not reached its bicentennial without keeping up with trends, Beam subsidiaries introduced a pair of alcoholic beverages that would have been most out of place in the late 18th century: Mad Melon Watermelon Schnapps and After Shock Liqueur. The latter promised drinkers "an initial blast of hot, fiery cinnamon followed by an icy cool sensation when you inhale." After Shock proved hot indeed, selling one million bottles after only three months on the U.S. market.

Reaching into the past also proved popular. Mexico’s most notable export was Encantado Mezcal, a spirit whose heritage dated to the 19th century, when the "cognac of Mexico" was imbibed solely by the colonial aristocracy. Mexico was also the focus of an industrywide controversy, namely a debate over what could and could not be called margaritas. Mexican officials wanted companies like E&J Gallo and Seagram to stop marketing items as margaritas if they continued to make them without tequila. In Russia a court was no more generous with its heritage, keeping Grand Metropolitan from using the Smirnoff name to sell vodka there, where the name had originated in the tsarist era.

The U.S. spirits market continued to sag, suffering a 1.8% decline in 1994. The prospects appeared brighter in Asia, however, where the demand for liquor translated into a 50% sales increase between 1991 and 1995. Greg L. Prince

Wine

The 1995 harvest reports indicated mixed results. French producers were mildly optimistic for wines of good to superior quality, with moderate yields after an extremely hot summer and a harvest troubled by early rains. Bordeaux and Burgundy producers who were able to harvest after the rains were not greatly affected. Alsace and Loire producers were able to take advantage of late summer conditions to bring their grapes to ripeness, conditions that were repeated in Germany.

Italy, however, had an off vintage, leaving producers concerned about the size and quality of the crop or wondering whether they would be able to produce vintage wines at all. The early season experienced drought conditions, which stressed the vines, followed by high summer heat and humidity. Later, hailstorms further damaged vineyards. The Italian press tried to save the reputation of the vintage, saying that growers who had waited harvested a small crop of superior quality, but only time would tell.

In California the early season was plagued by flooding, but this gave way to a moderate summer and a harvest later than usual, with the promise of another vintage of high-quality wines. The demand for certain varieties continued to drive grape prices upward, particularly in merlot and bulk juice.

In sales, auctions continued their strong performance for wines of high price or limited availability, with older Bordeaux setting new price records. In London a case of 1945 Mouton-Rothschild in pristine condition brought the incredible price of $46,630. New York City showed a great increase in auction activity in 1995 owing to relaxed sales restrictions.

Exports of wine continued to show growth on a worldwide basis as more countries sought markets beyond their borders. Wines from South America, New Zealand, Australia, and South Africa became widely available and gained acceptance for quality. Late in the year a major wine publication gave an Australian wine its top honour as wine of the year. Eastern European wines grew in distribution with a reputation for acceptable wines at moderate prices. At the same time, the so-called wine lake in Europe continued to shrink, owing in part to restrictions on production by the European Union. A surprisingly mild backlash occurred against French exports as a result of that country’s nuclear tests in the Pacific. Howard Hering

Soft Drinks

The Pepsi-Cola Co. extended its reach farther beyond carbonated soft drinks in 1995 than ever before. Among the products it tested were Smooth Moos, a flavoured dairy drink; Aquafina, a bottled water; Mazagran sparkling coffee, part of a joint venture with Starbucks; Josta, a high-caffeine drink based on the South American guarana berry; and Sierra, billed as a nontraditional "ice soda." The Coca-Cola Co., meanwhile, relied more on tradition, trying to add even more to the already global recognition enjoyed by its flagship product. Just as it had adapted the original contour shape to an updated Coke bottle in 1994, the company took packaging a step farther in 1995, experimenting with a similarly curved can in Germany. The Arizona brand of iced teas and fruit drinks attempted to challenge both Coke and Pepsi by introducing carbonated drinks: three flavoured colas and a root beer in its "Cowboy Cola" line. Observers were uncertain whether Arizona would be able to find a profitable market niche in this venture, though the company felt its unique marketing strategy would make it a competitor.

While Coke was not as quick as Pepsi to develop new products, it was not shy about buying other soft drinks, acquiring Barq’s Inc., a root beer specialist based in Baton Rouge, La. The biggest acquisition in soft drinks, however, was the long-awaited transaction that saw London’s Cadbury Schweppes complete its takeover of Dr Pepper/Seven-Up. The deal immediately made Cadbury a serious competitor in the U.S. for the first time. Both Coke and Pepsi tried to gain advantage outside the U.S. Coke decided that one of the best ways to build its business was through establishing "anchor bottlers," franchisees that would serve as the springboard for inundating entire regions with their product. Coke created such ventures with Panamco in Latin America and Sabco in southern Africa.

Other companies were willing to do the same thing. Cadbury took Dr Pepper to Argentina for the first time. In the U.K. the private-label producer Cott made real inroads by supplying the concentrate for Sainsbury’s Classic, the country’s leading store brand, which through lower prices grabbed a 7% share of the market in just one year. Another Cott client, the Virgin Group, infiltrated Japan with its private-label offering.

As 1995 came to a close, the U.S. soft drink market was growing in retail establishments at an annual rate of about 1.5%, while the industry as a whole was expected to increase by 2% over 1994. North America was estimated as accounting for 46% of soft drink consumption during the previous year, with Western Europe representing 31% and Asia 18%. Greg L. Prince